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Business > 2.1 rising finance > Flashcards

2.1 rising finance Flashcards

1
Q

What are types of internal sources of finance

A

Owners capital
Retained profits
Sale of assets
Sale and leaseback

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2
Q

What are types of external sources of finance

A 
‘Family and friends’
Banks
Peer to Peer lending (P2PL)
Business angels
Crowdfunding
Other businesses (B2B funding)
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3
Q

Why would business need finance

A 
Equipment
Raw materials
New premises
Expansion
New Technology
Staff training
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4
Q

What is capital expenditure

A

Spending on business resources that can be used repeatedly

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5
Q

What is revenue expenditure

A

Spending on business resources that are used in the short term

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6
Q

Examples of capital expenditure

A

Machinery
New Premises
Company vehicle
New technology

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7
Q

Examples of revenue expenditure

A 
Wages
Raw materials
Fuel
Maintenance
Repairs
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8
Q

Benefit of capital expenditure

A

Will help company to grow in the long term

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9
Q

Benefit of revenue expenditure

A

Will help company operate today

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10
Q

Owners capital examples

A 
Cash and investments
Redundancy payments
Inheritances
Personal credit cards
Remortgaging
Putting time into the business for free
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11
Q

What is owners capital

A

Money provided by the owners in a business

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12
Q

Advantages of owner capital

A 
Cheap 
The Entrepreneur maintains control 
Good for startups
Time - Quick can be reduced if funds are already available
Shows confidence to other investors
Focuses the mind!
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13
Q

Disadvantages of owner capital

A

It can take time to raise

Can be risky for the entrepreneur if they have remortgaged and have no plan B

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14
Q

What is retained profit

A

Profit after tax that is put back into the business

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15
Q

Advantages of retained profit

A

Cheap (no interest, debts)
The business maintains control
Flexible - the business can decide when they use it
Time - no need to complete lengthy applications
Low risk as no additional investors involved

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16
Q

Disadvantages of retained profit

A

No good for startups
The opportunity cost - dont get the money for shareholders is that the owners (shareholders) receive lower or no dividends
Conflicts between shareholders and managers
No profit no funding

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17
Q

What is sale of an asset

A

An asset that is no longer needed is sold

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18
Q

Advantages of sale of an asset

A

Cheap
The business maintains control
Time - no need to complete lengthy applications
Low risk as no additional investors involved

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19
Q

Disadvantages of sale of an asset

A

No good for startups
The opportunity cost is that the asset is no longer available for use in the business
Conflicts may arise amongst employees if the asset is still in use

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20
Q

What is sale and leaseback

A

The business sells an asset to another firm and leases back

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21
Q

Advantages of sale and leaseback

A

Cheap (no interest)
The business maintains control
Time - Quick

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22
Q

Disadvantages of sale and leaseback

A

Expensive - the cost of leasing back can be high

No good for startups

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23
Q

Advantages of internal sources

A

Cheap
Owner maintains control of business
Fast

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24
Q

Disadvantages of internal sources

A

Limited amount ££
Not always available (especially for startups)
Limited amount of options

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25
Q

What is friends and family sources of finance

A

Can be a loan, gift or for % of business

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26
Q

Advantages of friends and family

A

Cheap - A lower interest (if any) can be agreed
The business maintains control
Time - no need to complete lengthy applications
Low risk as no additional investors involved

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27
Q

Disadvantages of friends and family

A

Relationships may deteriorate if debt is not repaid

28
Q

Banks sources of finance

A

loans, overdraft, mortgages and credit card

29
Q

Advantages of banks

A

Great for startups, although can be hard to convince the banks lately
Time - although a clear business plan must be presented
Low risk as no additional investors involved
The business maintains control

30
Q

Disadvantages of banks

A

Expensive - interest rates can vary and can be high especially for credit cards and overdrafts
Risk is high if debt is not repaid - the banks will not negotiate on repayment
Lots of paperwork

31
Q

What is peer to peer lending

A

Individuals can lend through an online process, do not give away equity but pay interest on loan

32
Q

Advantages of peer to peer lending

A

Great for startups, although a clear business plan must be presented
Time - easy to set up
Control is maintained by the business
Low risk to the entrepreneur as the lender takes all the risk
Cheap: Low interest rates offered

33
Q

Disadvantages of peer to peer lending

A

Expensive - the arrangement is based on the lender receiving a generous profit share
The website managing the process will take a % of the deal
Lenders have complete control over who they invest in

34
Q

What is business angels

A

Individuals that invest in return for a stake in the business

35
Q

Advantages of business angels

A

Great for startups and established businesses, although a clear business plan must be presented
Time - can be quick if the angel has the funds readily available
The business can benefit form the angels expertise in a particular area of the business

36
Q

Disadvantages of business angels

A

Expensive - the angel will expect a stake in the business and will receive dividends
The angel may want to have some control over the business

37
Q

What is crowdfunding

A

Individuals lend to business through websites such as ‘kickstarter’
Business either gives up equity % or its final product

38
Q

Advantages of crowdfunding

A

May be only way small business ideas can get funding (if they get turned down by bank loans)
Acts as advert for business
May attract advice and help as well as funds

39
Q

Disadvantages of crowdfunding

A

May not attract any other investors
May be a waste of time which could be used to source funds elsewhere e.g bank loans
Alerts to competitors to your need for funds

40
Q

Advantages of external sources

A 
Can raise more ££
(Some) maintain control
Get support (family/friends, bank or investor will all want you to succeed and may be able to help)
41
Q

Disadvantages of external sources

A

Takes time & effort
Give up control of business
Expensive (interest rate)

42
Q

What is credit

A

You can give credit or take credit. If you give credit you are the creditor if you take credit you are the debtor. If you are in credit with a supplier / bank that means you have access to funds with that supplier / bank

43
Q

What is a creditor

A

Lender of Money (bank, supplier, loan shark)

44
Q

What is a debtor

A

Person/Business that owes Money

45
Q

How high is risk of unlimited liability business

A

Risk is high due to personal assets being at risk

46
Q

How high is risk of limited liability business

A

Risk is lower, owners are protected - Therefore, more finance options are available.

47
Q

How would investors view a unlimited liability business

A

Banks would view you as higher risk and therefore, you might find it more difficult to source finance

48
Q

How would investors view a limited liability business

A

Less risky option for banks, you can also sell shares

49
Q

Control on unlimited liability business

A

Tight control as the owner has all the decision making power.

50
Q

Control on limited liability business

A

Control could be lost through the sale of shares

51
Q

Amount of Capital expenditure on an unlimited liability business

A

There is usually lower capital expenditure as the types of businesses tend to be service orientated.

52
Q

Amount of Capital expenditure on an limited liability business

A

Higher capital expenditure compared to sole traders, which debt can be secured against.

53
Q

How much do unlimited liability businesses tend to borrow

A

Sole traders and partnerships tend to borrow less as they have fewer financial needs

54
Q

How much do limited liability businesses tend to borrow

A

It would depend on whether the business is growing

55
Q

How do businesses assess their choice of finance

A 
TRECC (Time, risk, Established, Cost, Control)
Or DRA (Duration, Reason, Amount)
56
Q

What is cash flow forecasting

A

Cash flow forecasts are a prediction (forecast) of what the business expects their cash inflows and outflows are going to be over a period of time.

57
Q

What is a positive cash flow

A

A successful business must try to have more cash flowing in than they have flowing out.

58
Q

What is a cash flow deficit

A

If a business allows more cash flowing out than flowing in

59
Q

Net cash flow formula

A

Net cash flow = Total Monthly Inflow – Total Monthly Outflow

60
Q

Closing balance formula

A

Closing balance = Opening Balance + Net Monthly cash flow

61
Q

What is the opening balance

A

The closing balance for one month is the opening balance for the next

62
Q

Examples of Inflows (receipts)

A 
Cash sales
Receipts from trade debtors
Sale of fixed assets
Interest on bank balances
Grants
Loans from bank
Share capital invested
63
Q

Examples of Outflows (payments)

A 
Payments to suppliers
Wages and salaries
Payments for fixed assets
Tax on profits
Interest on loans & overdrafts
Dividends paid to shareholders
Repayment of loans
64
Q

Positives of cash flow

A

Plan ahead
Spot problems
Financial Control
Make lenders confident

65
Q

Negatives of cash flow

A

It is an estimate
Can’t predict external forces
It takes time
Can’t be used in isolation

66
Q

Why Produce a Cash Flow Forecast?

A
  • Advanced warning of cash shortages
  • Make sure that the business can afford to pay suppliers and employees
  • Spot problems with customer payments
  • An important part of financial control
    Provide reassurance to investors and lenders that the business is being managed properly

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